After announcing its second quarter earnings, Facebook (NASDAQ:FB) quickly became the darling of tech stock investors. Shortly after the posting, Facebook’s stock price rose 26% to $33. Investors are taking Facebook’s creation of the world’s most popular social network as a way to generate portfolio growth and revenue. As with all things, they do come to an end. Shortly after the surge in the price, Facebook finally reached its IPO price of $38 with shares currently trading only a few dollars above this level.

Financial Facts

Facebook’s revenues were up 53% over the second quarter from last year. The gains were made in the mobile sector. Recent market research shows the majority of users access Facebook from a mobile device rather than a desktop format. The mobile sector accounts for 41% of Facebook’s revenue. GAAP costs for the quarter were $1.25 billion. While the GAAP operating margin and net income were in the red for the same quarter in 2012, the results for the second quarter of 2013 showed an operating margin of 31% and net income of $333 million. Facebook products “Verified Pages” and “Facebook for Every Phone” are predicted to grow for the rest of this fiscal year and into the next.

The Competition

The two main competitors for social media are Google (NASDAQ:GOOG)and Microsoft (NASDAQ:MSFT). Google’s operating margin is 23.95%, while Facebook’s is 31.06%. Microsoft still leads the field with an operating margin of 34.38%.

The anti-Google investors’ argument against purchasing Google lies in that Google relies too heavily on advertising rather than in technological innovation. Google lovers point to the Google Glass as proof that Google is dedicated to new technology and is still innovating. Google secured a patent in August, 2013 on the gaze technology that is utilized by Google Glass. Theoretically, any time a user “gazes” at an ad, the advertiser would be paid.

Despite its innovation with Google Glass, Google’s own financial statements to investors show that they generate the majority of their income from advertising. The upshot of their technological advances can be summed up as a way to generate more advertising revenue. In fact, some investors were shocked by Google’s decision to “give away” their Android operating system. Google management saw the mobile market as a threat to their revenue stream. By providing Android to tablet and mobile manufacturers, Google was able to protect its market share and create an additional revenue stream.

In contrast, Facebook boasted 1.11 billion active users as of March, 2013 and investors wanted a piece of the pie. Its IPO was the largest in tech stock history. Facebook closed at a disappointing $38.23 on its first day of trading and is now trading around $42 (as of writing this article).

Facebook is sound financially and in some areas performs better than Google, but still lags behind Microsoft. Its estimated EPS growth over the next five years is 29.59%, beating Google at 14.52% and Microsoft at 8.63%.

Aside from its financial stability, Facebook is poised to take on Google in other areas. Google has always targeted advertising based on user search. Searches are individualized based on user patterns and it was a logical progression to make advertising individualized based on searches. Even Gmail use creates individualized ads based on topic or text.

Facebook has risen to the challenge of ad revenue and is perhaps better suited to individualizing ad content. Facebook collects more data on its users based on tracking each user’s friends and pages. This affords advertisers a chance to truly meet users who are likely to be interested in their product based on the Facebook profile and how the user interacts within the platform.

Conclusion

Despite its strong showing in Q2, Facebook’s valuation may be stretched too much. When comparing price to sales, Facebook trades for about 3 times what Google does, but does not achieve the same level of growth. As a short term investment, Facebook looks good. Looking long term it’s doubtful that Google will lose any market share. If Facebook continues to post yearly gains, this could turn investors more bullish toward Facebook and cause Google to lose investors.

About the author:

Muhammad Bazil

Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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